5 Frequently Asked Questions for Home Refinancing

By Daniel Duffield

With interest rates rising at present, many homeowners are scrambling to refinance their mortgages. For the majority of homeowners, home refinance loans serve to reduce their current interest rates and lessen the expense of their monthly mortgage payments; however, refinances can be performed for a variety of reasons, such as altering the terms of the mortgage or withdrawing cash in exchange for equity. While refinancing is frequently beneficial to homeowners who qualify, there are many factors to consider before refinancing in order to make the most of the cost of obtaining the loan. Here are five frequently asked questions regarding home refinances that can help homeowners make the most of their refinance loans:

1.       Will I benefit from a refinance?

The first factor to consider when obtaining a refinance loan is how much you will benefit. You must weigh the cost of obtaining the refinance, including any necessary appraisals, credit checks, employment verification, and other expenses that will be charged in the closing fees, against the benefits of the refinance, including the money saved from lower mortgage rates and payments, the utility of any withdrawn cash, and the potential increase in loan stability. While not always simple to calculate, forming an idea of the relative costs versus the benefits will help you to determine whether a refinance is either necessary, prudent, or uneconomical.

2.       Should I discuss my options with my current lender before shopping around?

Prior to shopping around for refinance loan quotes from lenders in your area, it is advisable that borrowers discuss what refinance options are available with their current lender; the majority of mortgage lenders use retention programs to entice borrowers to sticking with them for a new loan, although these teals tend to be less profitable than simply shopping around. If you find that better deals are available, find a new lender to work with, as your mortgage lender will not be in any hurry to finalize the refinance, since he or she already has your business.

3.       Can I still refinance if my home value has decreased?

Whether or not you can refinance after your home value has decreased depends on a variety of factors, including your current loan-to-value (LTV) ratio and the type of mortgage that you current hold. Borrowers with FHA loans and VA loans, backed by the Federal Housing Administration and the Department of Veteran Affairs respectively, can possibly qualify for streamline refinances, which do not take into consideration the property value in the transaction. For conventional borrowers, a refinance may be feasible if the home’s value has not decreased such that the mortgage debt exceeds its current value. In these circumstances, borrowers with loans owned by Fannie Mae or Freddie Mac can qualify for refinance loans through the HARP program, or the Home Affordable Refinance Program. While other options may apply, these are the most common methods for refinancing in the event of property depreciation.

4.       Is choosing a lender by the lowest offered mortgage payment a bad idea?

Many inexperienced borrowers select mortgage offers from lenders based solely on the lowering their monthly mortgage payments. While this is a common reason for refinancing in the first place, many other factors should come into consideration when getting a home refinance loan. For instance, the type of interest payment plan can make a significant difference in both the affordability and stability of a mortgage; while adjustable-rate mortgages (ARM) generally offer lower rates and by correlation lower mortgage payments, these loan products inherently include more risk, as your mortgage payments will change annually to reflect the market conditions at the time of adjustment. Accordingly, borrowers should evaluate the loan product as a whole, pros and cons, rather than only considering monthly mortgage payments when choosing a program or loan.

5.       Should I get a no-cost refinance?

The term no-cost refinance is somewhat of a misnomer; in reality, there is no such thing as a refinance loan that does not include any costs. What is often referred to as a “no-cost refinance” is actually a standard refinance loan in which the closing costs and other processing fees are rolled up into the principal balance of the loan, or else paid for by the lender. In either case, you, as the borrower, will still be paying something; for the former option, the costs added to the principal balance will greatly inflate the expense of the loan overall as a result of the greater interest payments, while for the latter option, lenders will charge borrowers a higher mortgage rate in exchange for paying the closing fees. Regardless, both cases cost more than standard refinance options, in which the borrower pays the closing costs of the loan.

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